The Financial Conduct Authority (FCA) has established that a number of small banks and commercial insurance intermediaries are failing to effectively manage financial crime risk.

The regulator published two reviews today, which follow related work by the FCA’s predecessor on banks in 2011 and intermediaries in 2010.

While the reviews found some firms had made good progress in addressing areas of weakness and saw examples of good practice, there were significant shortcomings at other firms. The FCA has proposed further guidance for all firms to ensure that expectations are clear.

Tracey McDermott, FCA director of enforcement and financial crime, said: “Firms must take their responsibility to reduce the risk of financial crime seriously. Significant improvements are still required in this area.

“To do that successfully requires firms to use their judgement and common sense. That is not about box ticking or wholesale de-risking. It is about firms getting the basics right – understanding their customers, the risks they pose and managing those risks proportionately and sensibly.”

The FCA reviewed ten commercial insurance intermediaries and 21 banks – 10 of these firms (five banks and five intermediaries) were also part of the 2010 and 2011 thematic reviews. The FCA found:

• Despite extensive work over recent years to address key issues, there were significant and widespread weaknesses in most banks’ anti-money laundering systems and controls, and in some banks’ sanctions controls. Although senior management engagement had improved, a third of banks had inadequate resources; staff often had weak knowledge of money laundering risks; and some overseas banks struggled to reconcile their group policies with higher UK requirements. Since the FCA’s review, several banks have replaced their Money Laundering Reporting Officers; four firms have temporarily restricted their business whilst they correct the weakness in their controls; and the FCA has instructed three banks to undertake an independent review of their systems and controls (a skilled person’s review); and two firms have been referred to the enforcement division for investigation.

• Overall, most intermediaries’ controls failed to manage bribery and corruption risk effectively. While some intermediaries’ policies on remuneration, hospitality and training had improved since the last review, bribery and corruption risk assessments were often too narrow and many firms failed to take a rounded view of the risks associated with individual relationships. Half of the third party and client files reviewed were inadequate and senior management oversight was often weak.